Monday, March 1, 2010

This is a follow up to my post earlier today. This chart shows the Institute for Supply Management's manufacturing employment index. This index has traced what could be the biggest V-shaped recovery of them all, surging from a low of 25.9 to 56.1 in just one year. In the past 20 years it has been this high or higher in only 10 months (2004-2005). This is undeniably good news, as it is a clear sign of new hiring activity.

The contrast between zero yield on cash, which implies an extremely high degree of risk aversion, and multiple signs of a V-shaped recovery, which imply an economy that is in much better shape than zero yields on cash suggest, is highly interesting. I highlight the V signs because I think the market is not paying enough attention to how well the economy is doing. There is way too much emphasis on all the problems.

Hi Scott, I disagree with your statement that the market has not paid attention to the "V's". In fact, if you view a chart of any major market index, you will see that they made a "V" recovery ahead of the economic data and even kept moving upward in the face of negative data. The current market choppiness represents its lack of visibility of future economic growth. The current economic data is old news to a stock market that had recovered by last October.

Rick: Your points are very valid. This is a subjective issue, however, as are all attempts at valuation or divining the market's motivations. I'm persuaded that the market has still not priced in all the good news as reflected in the ongoing series of V-shaped recoveries. Plus, I think the significant recoveries that we are seeing in many parts of the economy have a certain synergy that will be revealed in the future, and that will serve to generate economic growth in excess of what the market is currently discounting.